In the 1998 decision of State Street Bank & Trust Co., v. Signature Financial Group, Inc. 149 F.3d 1368 (Fed. Cir. 1998), the Circuit Court of Appeals for the Federal Circuit opened the door to obtaining patents on tax strategies when it generally held that business methods were patentable. Although State Street did not specifically involve a tax patent, and no case since State Street has addressed the patentability of a tax strategy, many people have since filed and obtained patents on tax-related strategies on the basis that these strategies fit within the business method exception. In fact, the ABA Section of Taxation Task Force on Patenting of Tax Strategies stated that, as of January 2010, at least 90 patents were in existence for tax-related advice and many more were pending.
As part of a broader patent reform initiative, President Obama signed into law the “Leahy-Smith America Invents Act” (HR 1249) on September 16, 2011. The Act includes legislation aimed at preventing the issuance of patents for tax strategies. Specifically, Section 14 of the Act provides that “any strategy for reducing, avoiding, or deferring tax liability, whether known or unknown at the time of the invention or application for patent, shall be deemed insufficient to differentiate a claimed intervention from the prior art.” The Act is effective immediately and applies to any patent application pending and any patent issued on or after the date of enactment. It does not, however, apply to tax preparation software or invalidate existing tax patents issued prior the enactment.
This new legislation is aimed at settling the polarizing debate of whether an individual should be able to obtain a patent on a tax strategy designed to avoid or minimize tax. For example, an installment sale to a grantor trust, although now well known, was once a novel estate planning idea. If an individual or firm obtained a patent on a strategy such as this, then a practitioner seeking to implement such a strategy into a client’s estate plan would be required to pay royalties to, or obtain consent from, the patent holder. It is truly a policy debate at its heart. Some practitioners argue that innovative strategies to minimize tax should be rewarded through the issuance of tax patents. Others assert that taxpayers should not be penalized for legally complying with the tax code.
Permitting patents for estate-planning techniques would substantially change the profession. Practitioners would be required to conduct patent searches prior to implementing planning techniques, which would undoubtedly increase legal costs to clients and expose the practitioner to additional liability. Additionally, the sharing of information and new ideas is an extremely important part of the legal community, especially the tax and estate-planning community. What would conferences such as Heckerling and Southern Federal Tax Institute be if practitioners were actually discouraged from discussing new ideas in a public forum?
The Act is sure to spark additional debate and it will be interesting to see the full ramifications of this legislation as time progresses.